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Woodmen of World Life Insurance Society v. Nebraska Department of Revenue

Supreme Court of Nebraska

February 16, 2018


         1. Administrative Law: Judgments: Appeal and Error. In an appeal under the Administrative Procedure Act, an appellate court may reverse, vacate, or modify the judgment of the district court for errors appearing on the record.

         2. __:__: __ . When reviewing an order of a district court under the Administrative Procedure Act for errors appearing on the record, the inquiry is whether the decision conforms to the law, is supported by competent evidence, and is neither arbitrary, capricious, nor unreasonable.

         3. Administrative Law: Statutes: Appeal and Error. The interpretation of statutes and regulations presents questions of law, in connection with which an appellate court has an obligation to reach an independent conclusion irrespective of the decision made by the court below.

         4. Statutes: Legislature: Intent. In construing a statute, a court must determine and give effect to the purpose and intent of the Legislature as ascertained from the entire language of the statute considered in its plain, ordinary, and popular sense.

         5. Statutes: Appeal and Error. Absent a statutory indication to the contrary, an appellate court gives words in a statute their ordinary meaning.

         6. Statutes. A court must attempt to give effect to all parts of a statute, and if it can be avoided, no word, clause, or sentence will be rejected as superfluous or meaningless.

         7. __ . Statutes relating to the same subject matter will be construed so as to maintain a sensible and consistent scheme, giving effect to every provision.

          [299 Neb. 44] 8. Taxation: Proof. The burden of showing entitlement to a tax exemption is on the applicant.

         9. Statutes: Taxation. Statutory tax exemption provisions are to be strictly construed, and their operation will not be extended by judicial construction.

         10. __:__. An exemption from taxation must be clearly authorized by the relevant statutory provision.

         11. Taxation: Presumptions. An exemption from taxation is never presumed.

         12. Appeal and Error. An appellate court is not obligated to engage in an analysis that is not necessary to adjudicate the case and controversy before it.

         13. Taxation: Words and Phrases. Sales and use taxes are imposed on the activity of retail transactions, measured by gross receipts. It is a tax upon the sale, lease, rental, use, storage, distribution, or other consumption of tangible personal property in the chain of commerce.

         14. Taxation: Sales. A sales tax is not imposed on the article sold, but, rather, upon the transaction called the sale.

         15. Taxation: Words and Phrases. Both occupation taxes and sales taxes are excise taxes for the purpose of raising revenue. An excise tax is a tax imposed on the manufacture, sale, or use of goods or on an occupation or activity, and is measured by the extent to which a privilege is exercised by the taxpayer, without regard to the nature or value of the taxpayer's assets. An excise tax is imposed upon the performance of an act.

         16. Statutes: Taxation. The plain language of Neb. Rev. Stat. § 44-1095 (Reissue 2010) exempts taxes on the "funds" of a fraternal benefit society, but it does not exempt the fraternal benefit society from sales and use taxes, because such taxes are imposed on its retail purchase activity, not on its funds.

         17. Due Process. The first step in a due process analysis is to identify a property or liberty interest entitled to due process protections. If there is a protected interest at stake, the question then becomes what process is due.

         18. __ . The fundamental requirement of due process is the opportunity to be heard at a meaningful time and in a meaningful manner.

         19. Trial: Expert Witnesses: Appeal and Error. A trial court's ruling in receiving or excluding an expert's testimony which is otherwise relevant will be reversed only when there has been an abuse of discretion.

         20. Expert Witnesses: Evidence. Expert testimony is relevant and admissible only if it tends to help the trier of fact understand the evidence or determine a fact issue, and expert testimony concerning a question of law does not tend to accomplish either of these goals. Consequently, [299 Neb. 45] expert testimony concerning a question of law is generally not admissible in evidence.

         21. Trial: Expert Witnesses: Testimony: Statutes. Expert testimony from legal scholars on the proper legal interpretation of statutes is generally irrelevant and should not reach a judge's attention by way of the witness stand.

         Appeal from the District Court for Lancaster County: Andrew R. Jacobsen, Judge. Affirmed.

          Mark E. Novotny, John M. Walker, and Daniel J. Hassing, of Lamson, Dugan & Murray, L.L.P., for appellant.

          Douglas J. Peterson, Attorney General, and L. Jay Bartel for appellees.

          Heavican, C.J., Miller-Lerman, Cassel, Stacy, Kelch, and Funke, JJ.

          Stacy, J.

         This appeal requires us to determine whether the Legislature has exempted fraternal benefit societies from sales and use taxes imposed by the State of Nebraska. Woodmen of the World Life Insurance Society (Woodmen) requested an exemption from sales and use taxes and sought a refund of more than $2 million in such taxes previously paid. The Nebraska Department of Revenue (NDOR) denied Woodmen's request, and after a hearing, the Tax Commissioner affirmed that denial. Woodmen sought judicial review, and the district court affirmed. Because we agree no statute exempts fraternal benefit societies from paying sales and use tax, we affirm the judgment of the district court.

         I. FACTS

         1. General Background Nebraska's statutes regulating and relating to fraternal benefit societies are codified at Neb. Rev. Stat. §§ 44-1072 to 44-10, 109 (Reissue 2010 & Cum. Supp. 2016). A fraternal benefit society is defined to include:

[299 Neb. 46] Any incorporated society, order, or supreme lodge, without capital stock, . . . conducted solely for the benefit of its members and their beneficiaries and not for profit, operated on a lodge system with ritualistic form of work, having a representative form of government, and which provides benefits in accordance with sections 44-1072 to 44-10, 109 . . . [1]

         Fraternal benefit societies operate "for one or more social, intellectual, educational, charitable, benevolent, moral, fraternal, patriotic, or religious purposes for the benefit of its members."[2] They may enter into contracts to provide benefits to their members, including death, endowment, annuity, disability, medical, and life insurance benefits.[3] A fraternal benefit society may "invest its funds only in such investments as are authorized by the laws of this state for the investment of assets of life insurers."[4] All assets must be held, invested, and disbursed for the use and benefit of the society[5]

         It is undisputed that Woodmen is a Nebraska fraternal benefit society. The primary issue in this appeal is whether Woodmen is exempt from paying Nebraska sales and use taxes. The answer to this question generally requires consideration of two statutes: § 44-1095 and Neb. Rev. Stat. § 77-2704.12 (Reissue 2009).

         (a) § 44-1095

         With two exceptions not relevant here, the "funds" of a fraternal benefit society are exempt from taxation pursuant to § 44-1095 (Reissue 2010) which, until recently, provided: "Every [fraternal benefit society] shall be a charitable and benevolent institution, and all of its funds shall be exempt [299 Neb. 47] from all and every state, county, district, municipal, and school tax other than taxes on real estate and office equipment."

         The version of § 44-1095 quoted above was in effect when Woodmen applied for the tax exemption and refund at issue in this appeal, and we confine our analysis to this statutory language. However, for the sake of completeness, we note the Legislature amended the statute in 2015.[6] Section 44-1095 now provides that "all of [a charitable benefit society's] funds and property shall be exempt from all and every state, county, district, municipal, and school tax."[7]

         (b) § 77-2704.12(1)

         The Nebraska Revenue Act of 1967[8] imposes a sales tax on the gross receipts of retail sales of tangible personal property sold in this state[9] and a use tax when tangible personal property purchased outside of Nebraska is stored, used, or consumed in Nebraska.[10] Generally speaking, the sales tax applies when tangible personal property is purchased in Nebraska and the use tax applies when it is purchased outside Nebraska.[11]

         The Legislature has exempted certain sales and uses from taxation.[12] As relevant to this appeal, certain nonprofit organizations are exempt from sales and use taxes under § 77-2704.12(1). The nonprofit organizations enumerated in § 77-2704.12(1) include, for example, those created exclusively [299 Neb. 48] for religious purposes, [13] private educational institutions, [14] hospitals and health clinics, [15] and certified organizations providing community-based services for persons with disabilities.[16]To be exempt from sales and use tax, an "organization listed in [§ 77-2704.12(1)]" must apply for exemption using forms provided by the Tax Commissioner and, if approved, a certificate of exemption is issued.[17] Fraternal benefit societies are not listed among the nonprofit organizations enumerated in § 77-2704.12(1).

         2. Procedural Background

         In October 2013, Woodmen filed an application for exemption from sales and use tax with NDOR, relying exclusively on § 44-1095. Woodmen used a standard NDOR form to seek the exemption. Because the standard form did not identify § 44-1095 as a basis for seeking exemption from sales and use tax, Woodmen attached a letter explaining its position. NDOR denied Woodmen's application using a standard letter which also did not reference § 44-1095. Instead, the reason given for denying the exemption was that Woodmen did not qualify as a religious organization. NDOR gave this reason because it concluded that of the available nonprofit exemptions, that one "fit the closest."

         In January 2014, Woodmen filed a claim for overpayment, seeking a refund of more than $2 million in sales and use tax, again relying on § 44-1095. NDOR denied this claim. Woodmen petitioned for redetermination of both its exemption application and its reimbursement claim. In response, counsel for NDOR sent Woodmen a letter explaining the legal basis for NDOR's conclusion that § 44-1095 did not exempt Woodmen [299 Neb. 49] from sales and use tax. The parties agreed to consolidate Woodmen's requests and hold a single hearing before the Tax Commissioner on both the application for an exemption and the claim for overpayment.

         Prior to such hearing, the parties conducted discovery, exchanged exhibit and witness lists (including witnesses' expected testimony), and met to discuss the legal bases for their differing positions. The parties also filed prehearing motions that were ruled on by the hearing officer. As relevant to the issues on appeal, the hearing officer sustained NDOR's motion in limine to exclude the testimony of Woodmen's expert witness, a tax law professor. The hearing officer reasoned that although the professor was an accomplished and recognized legal scholar, his opinions on the proper interpretation of Nebraska law were more properly characterized as legal argument than testimony. The hearing officer invited Woodmen to include the tax law professor's opinions in its posthearing briefing, but did not permit the professor to testify.

         (a) Tax Commission Hearing

         The hearing before the Tax Commissioner was held April 13, 2015. The rules of evidence were not invoked.[18] The parties stipulated that Woodmen was a fraternal benefit society, that it timely submitted both its application for an exemption and its request for a refund, and that both were properly before the hearing officer. The Tax Commissioner observed that because the parties presented no factual disputes: "Resolution of this dispute depends entirely upon the answer to the following question of law: Is the language of § 44-1095 sufficient in itself to confer [on Woodmen] an exemption from the Nebraska sales and use taxes ....?"

         Evidence was adduced, and Woodmen made an offer of proof regarding the tax law professor's excluded testimony. After posthearing briefing, the Tax Commissioner entered an [299 Neb. 50] order finding Woodmen was not exempt from sales and use tax under § 44-1095, and thus was not entitled to a refund.

         The Tax Commissioner's order analyzed each party's proffered definitions of the term "funds" in § 44-1095, and ultimately rejected them all. Instead, he determined the meaning of "funds" by considering how the term was used in other statutes governing fraternal benefit societies.[19] The Tax Commissioner noted that under § 44-1093(2), fraternal benefit societies are authorized to "create, maintain, invest, disburse, and apply any special fund or funds necessary to carry out any purpose permitted by the laws of such society." Relying on § 44-1093, the Tax Commissioner concluded that "funds" under § 44-1095 must refer to "those same special funds allowed in § 44-1093." He thus reasoned that fraternal benefit societies were not exempt from sales and use taxes under § 44-1095, because that exemption applies only to taxes imposed on the "special funds themselves, not to the actions or transactions taken with respect to the funds."

         (b) Administrative Appeal

         Woodmen sought judicial review of the Tax Commissioner's final decision pursuant to the Administrative Procedure Act.[20]The Lancaster County District Court conducted a de novo review and affirmed the Tax Commissioner's denial of the exemption and refund.

         After noting that fraternal benefit societies are not among the nonprofit organizations exempt from sales and use tax under § 77-2704.12(1), the district court confined its analysis to whether the language of § 44-1095 conferred an exemption from Nebraska sales and use tax.

         First, the district court rejected Woodmen's argument that § 44-1095 conferred an entity-based tax exemption on fraternal benefit societies generally, as opposed to an exemption on just [299 Neb. 51] its funds. The district court noted the difference between the language used in § 44-1095 and the language used in statutes that provide entity-based tax exemptions[21] and concluded that a plain reading of § 44-1095 indicated the Legislature intended to confer a tax exemption on the "funds" of a fraternal benefit society, but not on the entity itself.

         Next, like the Tax Commissioner, the district court looked to other statutes governing fraternal benefit societies to discern the meaning of "its funds" in § 44-1095. The court observed that under § 44-1092, a fraternal benefit society is authorized to invest "its funds" only in certain investments, and that under § 44-1093, a society may "create, maintain, invest, disburse, and apply any special fund or funds" necessary to carry out its permitted statutory purpose. Harmonizing these statutes, the district court reasoned that the "funds" exempted under § 44-1095 must be the same funds referenced in §§ 44-1092 and 44-1093.

         Finally, the court examined the essential nature of sales and use taxes, including this court's opinion in Anthony, Inc. v. City of Omaha,[22] and concluded that sales and use taxes are '"a tax upon the privilege of buying tangible personal property'" and not a tax on funds. The district court reasoned that the tax exemption on funds in § 44-1095 did not apply to taxes on the retail transactions of fraternal benefit societies. As such, the court generally concluded there was no conflict between §§ 44-1095 and 77-2704.12(1), in that the former addressed exemptions for taxes on particular funds, while the latter addressed exemptions for taxes on retail transactions. Alternatively, the district court reasoned that if the ...

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